• C++ Programming for Financial Engineering
    Highly recommended by thousands of MFE students. Covers essential C++ topics with applications to financial engineering. Learn more Join!
    Python for Finance with Intro to Data Science
    Gain practical understanding of Python to read, understand, and write professional Python code for your first day on the job. Learn more Join!
    An Intuition-Based Options Primer for FE
    Ideal for entry level positions interviews and graduate studies, specializing in options trading arbitrage and options valuation models. Learn more Join!

Short Put, Positive Vega

gver

Joined
5/12/12
Messages
62
Points
18
i have a short vanilla ATM put and its vega seems to be coming positive today .. i can just see the vol surface going bad toay, with term structure in inversion .. its a 6M put .. could you explain why such a condition will exist ..
 
The term structure of volatility inverts typically when there is heavy demand for the front-month option markets. Kind of like what I'm sure happened during the Brexit event last year in that many market participants, in the week preceding the announcement, went into the S&P 500 options market to buy insurance should there be a strong negative price reaction to whatever the news ends up being. Lots of demand for option protection in front-month = inflated front-month option prices compared to relatively lower prices for further dated contracts = high implied volatility compared to back-month (further dated) contracts = option implied volatility term structure inversion.
 
Thanks for the answer .. but I am aware of the the inversion in the term structure owing to the demand of the protection .. but what I want to know is the reason for the change in the sign of Vega .. a long put means positive vega but the system is yielding a negative value as of now for this long position .. any idea why ?!
 
In your original post you wrote that you have a short ATM put, so do you have a long or short position? You're correct in that a short put position will have negative vega (i.e., make money when volatility falls) and a long put position will have positive vega (makes money when volatility increases).
 
Sorry for the typo .. I meant short position and getting a positive vega .. my concern is the opposite sign ..
 
just the normal bumps in the params to price the option ..
 
the bumps are based on quotes from trading desk .. and given the option is on a french underlying the nums are already pretty conservative, thanks to the election thing ..

i havent refreshed the sensitivity num again .. will try to do it and see if the anomaly persists !
 
Back
Top